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Monday, August 29, 2016

The RBI after Rajan

This article was first published by the Global Association for Risk
Professionals on August 25, 2016;

On September
4, 2013, the internationally prominent economist Raghuram Govind Rajan took
charge as the 23rd governor of the Reserve Bank of India. He decided in June to depart at the end of his politically
tumultuous three-year term, and with the August 20 announcement of his
successor, deputy governor Urjit Patel, the book on Rajan is officially closing.

A former
International Monetary Fund chief economist and University of Chicago finance
professor, Rajan came in with a “rock star” image, a contrast to his
predecessor, Duvvuri Subbarao, whose performance was the worst ever by an RBI
governor, according to Arvind Panagariya, then professor of economics at
Columbia University and now vice chairman of the government think tank NITI
Aayog. Subbarao had kept the Indian economy relatively stable during the global
crisis period. By the time he entered into the second phase of his tenure, in
2012, the economy was marred by nearly 10% inflation, a depreciating currency
and low GDP growth.

Rajan
dazzled with degrees from IIT (Indian Institute of Technology), IIM (Indian
Institute of Management) and MIT (Massachusetts Institute of Technology) and a
reputation for speaking his mind, was widely credited with predicting the 2008
crisis, and key economic indicators seemed to respond immediately to his moves.

Anticipated
Criticism

When Rajan
addressed the media after assuming office, he said, “Some of the actions I take
will not be popular. The governorship of the central bank is not meant to win
one votes or Facebook ‘likes.’” He said he sought “to do the right thing, no
matter what the criticism, even while looking to learn from the criticism” —
words that turned out to be prophetic.

Over the
three years that ended September 4, 2016, Rajan did mostly the right things. He
brought inflation down, stabilized the rupee, and GDP was going in the right
direction. Yet he could not escape criticism.

There was
really no end to the tug of war between him and the government over interest
rate cuts. The government continually pushed for greater cuts, while Rajan
refused until inflation fell within the targeted range. But even when inflation
was within the targeted range, Rajan did not cut the rates as much as the
government would have liked, citing risks in the global economy, rising crude
oil prices and uncertain monsoons.

Rajan was
also quite vocal about issues that did not directly come under his purview.
That did not sit well with the government, which needed to tread carefully due
to Rajan’s positive image amongst industry, the media and general public.

Return to
Academia

Subramanian
Swamy, a Harvard University PhD in economics and member of the Upper House of
the Parliament of India, stepped up as the central banker’s vocal public
critic. He was allowed to rant against Rajan for a long time before Prime
Minister Narendra Modi made his unhappiness over the entire issue known,
subtly, in a television interview. By then, Rajan had already issued a
statement saying that he would not be seeking another term and would return to
Chicago’s Booth School of Business, from which he was on leave.

There was
outrage. There were letters of support for Rajan, speculations about who would
succeed him and how he or she would measure up to Rajan in stature,
independence and ability to complete policy and regulatory changes in progress.

Modi’s
choice of Urjit Patel was seen as a safe one. Patel has a doctorate in
economics from Yale University, along with degrees from the University of
Oxford and London School of Economics. He has done stints at the International
Monetary Fund, World Bank, Brookings Institution, Reliance Industries and
Boston Consulting Group, and has been associated with various central and state
government task forces and committees.

Patel is
known to be the architect of the current monetary policy framework of RBI,
which focuses on inflation targeting. He is quieter and lower-profile than
Rajan. The consensus is that continuity in policies will be maintained and that
the government did well in appointing an “insider” to succeed Rajan.